The Risks and Rewards of Screening Tenants in the Detroit Rental Market

The Risks and Rewards of Screening Tenants in the Detroit Rental Market

4 min read
Drew Sygit

Drew is a classic overachiever, bringing intensity and passion to everything he does. While in the mortgage business, he rose to a VP position at the first broker he worked for and then started his own company.

Experience
In the pursuit of excellence, Drew obtained several mortgage designations and joined mortgage and several affiliate association boards. He also did WebX presentations and public speaking engagements. It was during this time, he started personally investing in single family rentals, leading him to start Royal Rose Property Management with two partners. He also joined the board of a local real estate investors association, eventually becoming its president.

The real estate crash led to an offer from the banking industry to manage a Michigan bank’s failed bank assets they acquired from the FDIC. The bank went on to eventually acquire four failed banks from the FDIC, increasing from $100MM in assets to over $2B while he was there. After that he took over as president of Royal Rose Property Management and speaks at national property management conventions.

Accreditations
Former board member of Michigan Mortgage Brokers Association, Financial Planners Association of Michigan & Mariners Inn (nonprofit)

Former taskforce Member of Michigan Association of CPAs (though not a CPA)

Involved in mortgage business for over 18 years, obtained mortgage designations: Certified Mortgage Planner, Certified Mortgage Consultant, & Certified Residential Mortgage Specialist

Board member of Real Estate Investors Association of Oakland; President since 2012

2009-2012 Shared-Loss Manager for Talmer Bank (now Chemical Bank) handling FDIC failed bank loan loss strategy, reporting, REO management, collections, & gap analysis

Started investing in real estate in 1996

President of Royal Rose Property Management since 2001

Education
Drew received an MBA from Wayne State University, concentration in Finance & Marketing.

Follow
LinkedIn

www.RoyalRoseProperties.com

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Our company operates out of the Metro Detroit area, which, as of this writing, contains the second-least-expensive housing market in the U.S. That means we’ve got a solid perspective on low-cost rental markets for which you won’t find much advice online. Over the course of this month, we’re going to talk a bit about how operating in a high-risk, high-reward environment affects the property management process. Today, we’re talking about how the Detroit rental market affects the tenant screening process.

Screen Time

The tenant screening process, as we perform it, consists of three basic steps. (These come after we’ve obtained the application fee and the application itself.)

  1. Collecting the necessary information from the tenant
  2. Running the applicant through our tenant-screening system to obtain an actual credit report (not just a summary score), nationwide eviction info, conviction history, and sex-offense history
  3. Calling the applicant’s current and previous landlords to inquire about their payment history and about how they took care of the property

If the applicant doesn’t provide everything we need up front, we call them to inquire and send (email) confirmation. This way we have a record of the interaction. If the tenant doesn’t reply within a few days, we call them again. If more than 14 days pass without any response to our emails or phone calls, we assume they’ve moved on and stop trying to reach them (though we don’t actually shut down their application; sometimes we do hear back from people that we thought were long gone!).

Related: 8 Essential Tips for Screening Tenants

Getting All the Information is Vital

One of the elements that makes Detroit a high-risk environment for property investors is the sheer number of people who can’t afford rent. Oftentimes these people have a vast amount of time on their hands, which they use to set themselves up to look as if they’ll be good tenants. The lengths some people will go to are astounding—but few people can fake 100 percent of the documentation they need to establish their employment history, rental history, credit report, and income verification. Even those people can usually be caught by thoroughly cross-referencing their detailed credit report with the other paperwork they turn in. We don’t cut any slack when it comes to screening documentation—you provide it all, or we don’t provide you with a place to stay—period.

Independent Research

If we have even the slightest reason to think it may be necessary, we go the extra mile to research references—especially from prior landlords. It’s a weekly phenomenon that someone to tries to pass off a friend or family member as a prior landlord, so we rarely, if ever, just trust that the people we’re talking to are actually who the applicant says they are. Our application department pulls public records to confirm who the owner of the building is before calling. The application department is also trained to ask open-ended questions to test the “landlord” and make sure they can confirm the information supplied by the tenant.

Balancing Considerations

A lot of nationwide tenants rent because they can’t qualify for a mortgage to buy a home. When you’re playing landlord in a market like Detroit’s, many applicants can’t even qualify for an unsecured credit card. Low credit scores and multiple collections are a given. So, you have to figure out a vastly different protocol for your approval criteria.

For example, in our experience, a consistent, stable job history is far more important than worrying about cell phone collection accounts. In contrast, someone who wants to pay several months of rent upfront if we don’t pull their credit sets off alarms. The more we can build a profile that says “dependable,” the better—even if it doesn’t say “well-off.”

shantytown

Problems as Bagels

But it’s not over yet. Because if it were, we would approve a stupidly small percentage of our applicants. This is Detroit—evictions, bankruptcies, criminal histories, and other issues aren’t exactly the norm, but they’re common enough that we have to offer our applicants an opportunity to tell their side of the story. So, we send out requests for LoX—that is to say, we ask for a letter of explanation, which we use to judge whether or not a particular red flag can be greened.

Some Things Can’t be LoXed (but May Be Worked Around)

Some things that can’t be explained away can still be made up for. If you’re a NINJA—that is, a No Income, No Job Applicant who claims they work but can’t provide pay stubs—we are going to deny you, unless you work with us to document something that shows you’re not doing something illegal to earn a living. If you have no rental history at all, same situation.

Related: The 4 Pillars of Tenant Screening

Some Things Can’t Be LoXed (and are Always No-Gos)

While we try to be as open minded as possible when it comes to allowing our applicants to explain bad-looking circumstances, there are some things that simply cannot be explained away. For example, if you’ve gotten jailed for cooking meth in your kitchen, sorry, we’re not interested. Also, if you show a pattern of several, relatively recent evictions—please look elsewhere.

When you’re screening tenants in a typical suburban neighborhood or middle-class area, you can adhere to the typical advice about which tenants to screen out. But when you’re screening tenants in a recovering economy, you have to modify your expectations. After all, there are still thousands of abandoned homes in Detroit—so the opportunity to forego rent entirely and squat in a house no one is paying any attention to is a silent competitor that we always have to keep in mind.

But what happens if an applicant slips through your screening regardless—or just turns into a problem six months down the line? Next time, we’ll talk about the realities of managing tenants in the pressure cooker of Detroit’s housing market.

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Do you have experience screening tenants in blighted markets? Let me know what strategies you use below!

Screening tenants in the Detroit rental market not only involves verifying application requirements, but also modifying some approval criteria.